LONDON – Leading up to its worldwide implementation next Jan. 1, the IMO 2020 regulation on marine fuel sulfur levels is generating lots of discussion about big impacts that it stands to have on shipping operations and lubricants used on ocean-going vessels.
But the regulation will probably have large and wide-ranging effects on petroleum refining operations and could lead to significant reductions in base oil refining capacity and reinforce the ongoing shift toward production of API Group II and III oils, according to one industry observer.
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IMO 2020 will have major ramifications on the refining industry and will impact base oils directly and indirectly, Stephen B. Ames, principal of SBA Consulting in Pepperpike, Ohio, said at the ICIS World Base Oils & Lubricants Conference here Feb. 21.
Part of a broader United Nations effort to reduce pollution from ships, IMO 2020 will reduce sulfur limits on marine fuels for most coastal and international waters from 3.5 percent by weight to 0.5 percent.
It’s probably the biggest change to hit the marine industry since the transition from sail to steam power, Ames said, and he contended that the regulation will have a similarly sized impact on refining because of decisions that it forces about what to do with one of the industry’s unwanted by-products – sulfur.
The regulation dictates four routes that vessels may take to compliance. One option is to switch to very low-sulfur heavy fuel oil with 0.5 percent or less sulfur. Another is to change to distillate fuel or marine gasoil with the same cap for sulfur. A third option is to use other types of fuels that are likewise low in sulfur, such as liquid natural gas or methanol. Finally, vessels may continue to run on high-sulfur fuel oil, but then they must be equipped with exhaust stack scrubbers that capture emissions.
Like other analysts, Ames said its difficult to predict with precision how the industry’s choices will break down because most ship operators are saying little about their plans. But he claimed that a couple things are safe to predict.
“Simply put, there is going to be a strong surge in demand for distillates, namely in the form of gas oil, and there is going to be a tremendous decline in consumption of high-sulfur fuel oil,” he said.
The problem for some refiners is that marine fuels have historically served as one of the more popular places for the industry to dump high-sulfur residual products. That strategy allowed many to avoid expensive upgrades that otherwise would have been needed to get rid of sulfur.
Those days are now numbered, Ames warned, and there will be few alternative markets in which to dump sulfur.
Refiners can respond in a number of ways, most of which can have direct or indirect impacts on base oils. High-complexity refineries – those with coking and hydrocracking or fluid catalytic cracking facilities – can convert high-sulfur fuel oil into products that hold some value such as gasoline or low-sulfur gasoil. Low-complexity refineries without such facilities will not have those options. If they are unable to find other ways of reducing sulfur levels – such as using sweet instead of sour crude – they will be stuck producing high-sulfur fuel oil or other sulfur sinks such as bitumen. Prices for those products are likely to fall relative to distillates, making it more difficult for them to survive.
Low-complexity refineries without coking, running high-sulfur crudes, are deemed vulnerable, Ames said. If those refineries have base oils plants, they are likely to be Group I plants, so their closures would mean further reductions in Group I capacity.
Low-complexity refineries may be able to reduce sulfur levels in their products by using sweet crude oil feedstocks instead of sour, which is higher in sulfur. But the fact that many refiners will be trying to do this means that demand for sweet crude will rise in relation to sour varieties, pushing up costs and eating into profits for those that can get it. Sweet crudes generally make poorer lubricant feedstocks, so for that reason, too, Group I outputs are likely to fall.
In contrast, high-complexity refineries will benefit from their ability to monetize feedstocks such as sour crudes and low-sulfur fuel oils, whose values are likely to fall, so they will probably become more profitable, Ames said. Where refineries of that category have base oil plants, they are likely to be Group II or III plants.
Group I plants make significant amounts of products that will lose value after IMO 2020 goes into effect, Ames said, so some refineries will probably close those plants and divert feedstock to distillates, which should rise in relative value.
“If you look at a typical Group I plant with bright stock, more than half of the products produced – the extracts and the asphaltenes – are very low value,” Ames said. “Some, maybe all of it, ends up in high-sulfur fuel oil. So when you no longer have any place to put them, why are you running a base oil plant for 30 percent of the yield and more than 50 percent of the output is products that the market is going away from?”
Ames emphasized that every refinery operates under its own circumstances – circumstances that depend on its facilities, its location, the crudes it can access and other factors. Those circumstances will influence which refineries may close. Nevertheless, he said, one can draw general conclusions about profiles of refineries that will be most vulnerable.
Russian refineries as a group produce the highest levels of high-sulfur fuel oil, which accounts for approximately 20 percent of overall output. European refineries are next at around 12 percent. In comparison, high-sulfur fuel oil accounts for roughly 3 percent, 5 percent and 7 percent, respectively, of United States, Canadian and Korean refineries.
IMO 2020 regulations will acutely impact European and Russian refiners, which have large surpluses of high-sulfur fuel oil that need to be placed elsewhere in the market, Ames said.